Sandy Spring Bancorp Inc (SASR) 2016 Q4 法說會逐字稿

Good afternoon and welcome to the Sandy Spring Bancorp Inc. conference call and webcast for fourth-quarter 2016 earnings.

(Operator Instructions)

Please also note that this event is being recorded. I would now like to turn the conference over to Mr. Daniel Schrider, please go ahead.

Thank you, and good afternoon, everyone. Welcome to our conference call to discuss Sandy Spring Bancorp's performance for the fourth quarter of 2016. This is Dan Schrider speaking, and I'm joined here today by our Chief Financial Officer, Phil Mantua; and General Counsel for Sandy Spring Bancorp, Ron Kuykendall. We appreciate you all joining our call today.

Our call is open to all investors, analysts, and the news media, and there will be a live webcast of today's call as well as a replay of the call available at our website later today. We will take your questions after a brief review of some key highlights, but before we get started, Ron will give the customary Safe Harbor statement. Ron?

Thank you, Dan, good afternoon, ladies and gentlemen. Sandy Spring Bancorp will make forward-looking statements in this webcast that are subject to risks and uncertainties. These forward-looking statements include statements of goals, intentions, earnings, and other expectations, estimates of risk and future cost and benefits, assessments of probable loan and lease losses, assessments of market risk, and statements of the ability to achieve financial and other goals.

These forward-looking statements are subject to significant uncertainties because they are based upon or affected by management's estimates and projections of future interest rates, market behavior and other economic conditions, future laws and regulations, and a variety of other matters, which by their very nature, are subject to significant uncertainties. Because of these uncertainties, Sandy Spring Bancorp's actual future results may differ materially from those indicated. In addition, the Company's past results of operation do not necessarily indicate its future results.

Thank you, Ron, and thank all of you again for joining the call. As I mentioned, we will move to your questions after I share some brief remarks. As the headline of our press release issued earlier today indicates, we achieved very strong net income for the fourth and final quarter, resulting in record annual earnings for 2016. Results continue to be driven by a terrific team of bankers, strong core operating performance, prudent balance sheet management, and a focus on operating efficiency. Our team continues to strive for and achieve strong growth and balanced results in a highly competitive market, proving that the Sandy Spring Community Bank business model is working.

So here's just a quick rundown of the main highlights from the release we issued earlier this morning. Net income for the fourth quarter of 2016 was $13.3 million, or $0.55 per diluted share, compared to net income of $12.8 million, or $0.52 per diluted share for the fourth quarter of 2015. And net income of $13.5 million, or $0.56 per diluted share for the linked third of 2016.

As you may recall, the prior-year quarter included a $4.4 million pre-tax recapture of previously accrued litigation expenses, as well as a $1 million charitable contribution. On a core basis, pre-tax pre-provision income for the quarter was $20.8 million compared to $16.7 million for the fourth quarter of 2015, a robust 25% increase.

Net income for the year ended December 31, 2016 was $48.3 million, or $2 per diluted share, compared to net income of $45.4 million, or $1.84 per diluted share for the prior year. Our continued strong core performance was driven by higher net interest income, which increased 9% in the fourth quarter of 2016 compared to the same quarter in 2015. Building on the first three quarters of the year, loan growth continued steadily at double-digit year-over-year rate.

Total loans, they increased 12% compared to the fourth quarter of last year and were up 4% compared to the third quarter of 2016. This was driven primarily by year-over-year growth of 17% in our commercial loan portfolio, which is a key focus of our corporate strategy. The provision for loan and lease losses for the fourth quarter of 2016 was a charge of $600,000 compared to a charge of $1.9 million for the fourth quarter of 2015, and a charge of $800,000 for the linked quarter of 2016. The decrease in the current quarter's charge versus the prior-year quarter is a result of lower net charge-offs and continued improvement in our loan metrics, which partially offset the effects of healthy loan growth. The provisions expense for all of 2016 totaled $5.5 million compared to a charge of $5.4 million for 2015.

Our net interest margin expanded to 3.52% for the fourth quarter, compared to 3.45% for the fourth quarter of 2015, and 3.5% for the linked third quarter of 2016. Our team has done an excellent job managing all variables in the margin equation. And on the deposit side at December 31, combined non-interest-bearing and interest-bearing transaction account balances increased 12% compared to balances a year ago.

Our ability to continue to grow retail and commercial transaction relationships and balances are key strengths of our franchise. Total deposits and other short-term borrowings that are part of overall funding sources derived from our clients also increased 10% compared to December 31, 2015.

Fee income, it was solid for the fourth quarter, increasing to $12.3 million for the quarter compared to $12.2 million for the fourth quarter of 2015, due to higher mortgage banking income that more than offset the decrease in income from wealth management. As you will recall, we sold a portion of our wealth assets under management in the first quarter of 2016. Our wealth business lines, mortgage banking division, and insurance agency are well positioned for the future.

Our fee businesses are not independent units; they are rather integrated lines of business aimed at meeting the needs of clients and enhancing their overall engagement with our Company. Expenses continued to be well-managed, and adjusting for the FHLB prepayment penalties in both the first and second quarter of this year, noninterest expenses remain very stable.

For the fourth quarter of 2016, our non-GAAP efficiency ratio was 57.54%, compared to 63.08% for the fourth quarter of last year and 56.33% for the third quarter of 2016. For the 12 months ended December 31, 2016, the non-GAAP efficiency ratio was 58.66% compared to 61.09% for the 12 months ended 12-31-15. At December 31, our capital position remained very strong, with total risk-based capital ratio of 12.8%, a tier 1 risk-based capital ratio of 11.74%, a tier 1 leverage ratio of 10.14%, and a tangible common equity to tangible asset ratio of 9.07%. And given the performance of our shares, there were no share repurchases during the quarter.

With organic growth our priority, we continue to seek both [whole] bank and fee-based acquisition opportunities, as well as adding to our revenue-generating teams through individual hires and team lift outs. Our focus and commitment to shareholders remains unchanged, consistently produce strong and balanced operating earnings from a diverse revenue stream, that results from creating meaningful remarkable experiences for our clients, our Sandy Spring employees, and our communities. And I hope that you find our results this quarter and year a demonstration of that focus.

That concludes my general comments for today, and we will now move to your questions. Andrea, we have your -- the first question, please, if you would -- appreciate if you would state your name and Company affiliation as you come on so we know with whom we are speaking.

(Operator Instructions)

Catherine Mealor, KBW.

Thanks. Good afternoon.

Good afternoon, Catherine.

Hi Catherine.

Phil, you mentioned in the past, that you believe the margin would be relatively stable with two rate hikes, and then would move slightly lower if we didn't see any rate hikes. So we already got one in December, and clearly with the move in rate, there's an optimism that we'll see more this year. Can you just update us on your thoughts on how you see the margin moving from here, just given the new rate outlook sure?

Sure, I'd be glad to. I think that it's very similar to the way we've discussed things in the past. I think that we'll certainly maintain the level that we ended the year into the first quarter here. We actually ended in December with a margin of 3.53, so that's another basis point higher than the quarter's average.

I could see that expanding a little bit, 1 basis point or 2 in the first quarter, again, maintaining throughout. And then, we have an expectation at the moment that there might be a second rate increase in the third quarter, latter part of the third quarter and then, from there, we might see a further expansion. But I don't have anything at the moment to your question about rates being more on the upside than not, that doesn't tell us that we're going to at least maintain margin, if not have it expand at some modest amount throughout the course of the year.

And what trends are you seeing so far in deposit competition in the market? Are you seeing your competitors move aggressively yet or still too early? And how do you think that's going to play out over the next couple of rate hikes?

Yes. I don't know that we've seen any over-riding significant move in terms of the competitive landscape on deposit rates. If anything, we've gotten more aggressive and probably moved up the ranking, so to speak, relative to the areas where we think that outside of what we're doing, in terms of core commercial [BDA] relationship, et cetera, that we need to augment for liquidity purposes, which would be our money market premier, which we've gotten more aggressive on in terms of teaser rate. And our time deposits, where I would suggest we're probably now in the upper third of offerings in that part of the market, as opposed to maybe having been more in the middle before. So it's important enough for us to almost get out in front of some of the other folks in some ways, and yet, haven't seen anybody else really react in any way different than in the past based on where rates have gone.

And borrowings were up a lot this quarter. How do you expect we should model management of growing borrowing versus managing your loan to deposit ratio?

Well, I think that liquidity management's certainly something that we're really going to be focused on for obvious reasons. We ended the year, from a loan and deposit standpoint, fairly close to 1.10. That's the year-end uptick in that ratio is not unusual because of what happens on some of our -- with some of our deposit relationships, but then rebuild again early in the year. But I think that the reason we're being as aggressive as we are in terms of deposit pricing, time deposit pricing or whatever, is to help alleviate that pressure, and that would then in turn minimize the need to maintain the borrowings level that we have.

One thing that we do have to remember in terms of that borrowing level at year end, and again, that's not unusual for it to be higher than other times during the course of the year is we also pre-funded what we anticipated doing and we disclosed in the release related to paying off our remaining trust preferred debt, which was $30 million of that run-up. So that's occurred and we've adjusted accordingly.

Okay. Great, makes sense. Great quarter. Thank you so much.

Thanks, Catherine.

Austin Nicholas, Stephens.

Hey, guys. Good afternoon. It's Austin.

Hi Austin.

Nice quarter. Hi guys. So just on -- maybe just on fees and your outlook there, going into 2017, with the rate hike behind us and another one coming, maybe if you could just talk about how that impacts both the mortgage business, and maybe your other businesses, wealth and insurance.

Yes. Austin, this is Dan. The -- as I mentioned in my comments, we did some right-sizing on the wealth side early in the year with the divestiture of part of our wealth assets, so we are -- we feel like we're in a pretty good spot right now in terms of that business and the ability to grow our fee base going forward. While at the same time, we do expect to continue to invest in revenue-producing people in our wealth business throughout the year as well.

The mortgage side had a solid year, and apart from the fluctuations that come with fast or speedy swings in rates, we would expect their ability to generate a fee income to be pretty consistent throughout the year based upon how we performed in 2016. So I think the outlook on both of those as well as insurance is a consistent trend.

Okay. That's helpful.

Maybe -- Austin, I might add, also remember on the insurance line, we did buy the one agency in August of last year, so we're going to get the annual effect of having their income stream throughout the course of the totality of 2017, which by itself, will grow that revenue line absent of any other organic growth that we expect.

Right. Right that makes sense. And then maybe just real quick on mortgage, what percentage was your purchase versus refi in the fourth quarter if you have it?

Let me see if I have that, Austin. I'm not sure if I do, and if not, try to get that before we get off the call, as others may ask some questions here. I've got it broken down into a couple of other ways in front of me, but I don't have it in that respect at the moment.

Okay. No worries. We can take that off-line or later if need be. And I think just my last question, bigger picture, M&A, any change in the message there and anything you're seeing in terms of potential partners being more willing to look at a partnership just given the run-up in valuations of bank stock?

Yes, Austin. It's Dan. I wouldn't say that there's been any change in the number of and frequency of dialogue that goes on there. I obviously had the same question myself with the effect of the last 60 to 90 days or so in terms of how shares have performed, but I think those that are interested in exploring the idea of a partnership are committed to that process. So I haven't seen anybody back off of those conversations as a result of the latest moves in bank stocks. So I think our overall message and activities there are consistent with the prior quarters.

Okay. Great. Well, thanks for the questions, guys. I think that's all I have.

Thanks, Austin.

Thanks, Austin.

Bryce Rowe, Baird.

Hi. Thanks. Good afternoon, guys.

Hi, Bryce.

Just a quick one on the allowance. And I'm sorry to ask this; I know this gets asked almost every quarter. But continue to see the allowance go down as a percentage of loans. Clearly a good indication of healthy credit quality within the bank. But just curious how much lower that can go.

And then, maybe a secondary question is, roughly, where do you see new loans being booked in terms of pricing and in terms of providing an allowance again? Thanks.

Yes. Bryce, this is Dan. Our moves that you're seeing in terms of provision expense and then overall allowance relative to loans is being driven by, as we said before, pretty consistent application of our methodology. And the driver behind the last couple of quarters here is really an improvement in loan metrics, while at the same time we're growing the portfolio. So our -- will continue to move down that path.

I would expect that, again, it'll be -- our provision expense will be driven by overall improvement in our metrics and in growth. Our credit quality metrics are in a really good spot right now, so how much that contracts, and therefore, drives provision expense down probably tapers at some point. But it's really methodology driven.

What we're seeing in terms of loan pricing, which I think was the second part of your equation or question on the commercial side, is expansion in yields this last quarter as we look at our pricing, month by month, but probably not necessarily in lock-step with the degree in which market rates have changed. So we're probably picking up about half of that expansion, and that is driven by the competitive pressures to not fully embrace where market rates have moved yet. That's both from banks and non-banks that are active, particularly on the CRE side of things. But overall, we're seeing yields pick up and we would expect to see that continue.

All right. Exactly what I was looking for. Thanks.

(Operator Instructions)

Casey Whitman, Sandler O'Neill.

Good afternoon.

Hi Casey.

Just to tack on to Catherine and Austin's questions on deposits and M&A, just hoping to get an idea of how your high loan to deposit ratio might play into M&A decisions here. I know we saw -- or we a branch deal just outside your market recently. Is that the kind of transaction, or that kind of transaction something you guys will look at as a mean to get to deposits -- to get more deposits?

Casey, I think we probably look at it more from a longer-term strategic view of the value of whether it's branches or whether it's a whole bank acquisition and how it would complement either geographically or by business line. But I will tell you that the value of the deposit franchise and its composition is an important part of that. We feel very confident that we can continue to raise deposits, and grow that book. But certainly, the deposit composition of a target and the quality of that versus whether it's organically grown or brokered or those types of things are certainly go into the equation as to attract it into a target.

Okay. Great. And then one more, just a housekeeping item. Other expenses, they were down last quarter and then ticked back up this quarter. What -- what's the net line item exactly? And is fourth quarter or third-quarter better on rate?

Casey, this is Phil. The fourth quarter, if we were to look back over time, there are always a handful of timing-related expenses for consulting services and the like that tend to hit us in the fourth quarter. That's just -- we can look back at last year's and see the same thing absent of the noise related to the litigation reversal.

But I would tell you that there's probably about $400,000 worth of expenses in this fourth-quarter number, in that other category that are not really going to recur as we move forward. So I would adjust based on that as opposed to saying, one or the other quarter is the more appropriate one to use for run rate. I think we were fortunate in the third quarter, in some ways, to have the number come where it is. And so the answer lies in between the two would be the best way to look at it

All right. Great. Thanks. Good quarter.

Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Daniel Schrider for any closing remarks.

Thanks, Andrea, and thank you all again for participating with us this afternoon. We appreciate receiving your feedback to help us evaluate the value of our call to you. And actually, I think we might have an answer to Austin's question that we might be able to offer here.

Yes. Very quickly, it looks the like overall percentage of loans that were for purchase were about -- it was about one-third of everything that was produced. Yes, just to clarify.

All right. Thanks, Phil, and thanks, everyone, again. You can email your comments to IR@sandyspringbank.com to again help us evaluate the value of today's call. So thanks again and have a great afternoon.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.